My v1 refurb died on me 3 months outside of my warranty. Had I had AppleCare, they would have simply replaced it. Since i didn't, I had to spend 300 to get the 16gb 3g.
It is worth the money if you plan on having the phone for 2 years.
Your standard warranty is free for the first year. With AppleCare you have to buy it before your standard warranty ends, or before the one year anniversary of your iPhone purchase. That will extend your warranty for another year giving you a total of 2 years coverage.